The other day I was out at a restaurant with a friend. I thought we would go Dutch. At the end of the meal, the friend insisted on paying the bill. “Damn,” I said jokingly, “had I known I would have ordered dessert.”
Now, in the sense of that specific incident, this is not true because I am on a Keto diet and would not have ordered that dessert no matter what. (Sugar is evil.) Also, as a matter of courtesy, if a friend was paying, I would either order the same as always or even less. But my awkward quip reveals an important truth about us and our money. This was best articulated by the economist Milton Friedman, who once famously laid out the four ways of spending money (see box).
One, you spend your money on yourself. (Example: you go out dining alone.) You will be careful both about the value you get, as well as about not spending too much. In other words, you will both economise and seek value, and will thus get maximum value-for-money.
Two, you spend your money on someone else. (Example: you buy a proforma wedding present for someone you are not close to.) Here, you don’t care so much for value —as you are not the beneficiary — but you will certainly economise, as it is your money being spent.
Three, you spend someone else’s money on yourself. (Example: You are on a foreign trip for your company at a five-star hotel, all expenses paid.) You will seek maximum value for yourself, and won’t be so careful about economising, as it is not your money that is being spent.
Four, you spend someone else’s money on someone else. In this case, you will neither economise, for it is not your money spent, nor look for value, as you are not the beneficiary. It is in this fourth instance that the most money is likely to be spent for the least benefit.
This is government.
Some of us tend to think of government as this divine body run by angels where all good intentions are transformed into good outcomes. But government is really a collection of human beings, and human beings respond to incentives. Friedman’s Law of Spending, in other words, applies to them. And they really are spending someone else’s money on someone else.
Let’s look at an illustration of this: the potholes of Mumbai. Now, there is a department in the local municipality that is supposed to look after our roads, and it does not do so well enough. This is not a consequence of the badness of the individuals involved, but of the system itself. These government employees are tenured and unaccountable. Also, they’re spending someone else’s money on someone else. They are likely to overspend and under-deliver. And indeed, every year, our potholes get repaired before the monsoons, and, in a few months, the roads are pockmarked again.